Beware the Consequences of Government Setting Health Prices

Prescription drug spending in 2019 was less than 10 percent of the nation’s $3.8 trillion health-care spending. But high drug prices clearly are low-hanging fruit when it comes to eye-dropping examples of how health-care companies exploit U.S. consumers.

The latest exhibit was last week’s report by the Congressional Budget Office (CBO) looking at drug prices paid by different federal programs. Millions of older and disabled Americans using the private drug plans offered under Medicare’s Part D drug program, it turns out, paid a whole lot more for their meds than did people using Medicaid and federal programs for current (Department of Defenses and Tricare) and former (Veterans Administration) military service members.

The CBO looked at spending on major brand-name drugs in 2017 across different federal programs. (I’d love to see results for a more recent year but timeliness and detailed health data are often incompatible concepts.) The Federal Supply Schedule, which is included in the chart below, reflects drug prices in other U.S. programs that take advantage of its volume-based purchase agreements. (Apologies for the lo-res file.)

Part D prices are much higher than those in other federal programs, including nearly double Tricare and VA prices. The prime reason is that Medicare is legally prohibited from using its massive market clout to negotiate for lower drug prices, while the military programs are not. The story with Medicaid is less straightforward. It’s relatively low retail prices reflect reduced consumer choices and more controls on consumer access to medication. State program oversight and budget pressures also make apples-to-apples comparisons misleading.

Congress did not accidentally forget to give Medicare the power to use its market muscle when it approved creation of the Part D program in 2003. Republicans controlled the White House and both houses of Congress, and used the strong consumer appeal of lower drug prices to overcome resistance from within their ranks. Democrats didn’t much like the bill but most did not want to miss a chance to broaden Medicare protections.

In exchange, the drug companies were able to open up a new vein of federal red ink. Consumers are protected from some of those higher Part D drug costs by the law’s open-ended federal subsidies. In 2019, Part D premiums paid by Medicare enrollees were about $15 billion, with Uncle Sam and state governments picking up nearly 85 percent of the program’s annual price tag of nearly $100 billion.

(Shameless commercial plug: My new health care book provides details on the success of private health care companies in getting Uncle Sam to subsidize consumer health costs. This permits continued health care inflation and hides the true costs of that care from the people who receive it.)

Trying to give Medicare the power to lower Part D prices is a perennial Congressional non-starter. However, always the optimist, it would not be surprising to see movement this year as part of a broader health bill. Republicans have usually supported the interests of private Part D insurers, but may wilt after being on the anti-consumer side of domestic spending initiatives of the new Biden administration that are popular even among Republican voters.

The likelihood of unintended and unappealing consequences is high here. Lowering Part D drug prices, however, would not necessarily cut billions from drug-company revenues. They would adopt new strategies to change pricing to other customers, including perhaps seeking higher prices from private employer insurance programs.

Never underestimate the ability of regulated entities to outwit regulators’ intentions. The CBO report included a diagram of how Part D drug prices are determined. Beyond its complexity, keep in mind that every interaction looks like a henhouse to people looking to make a buck off the program.